Busting tax myths of Deloitte

Deloitte Australia’s  Mythbusting tax reform report has made a useful contribution to the tax debate, but is misguided in a number of areas.

Deloitte confirms that super tax concessions are nowhere near as large as many commentators argue. I’ve created an interactive graph that shows the Budget cost of the Age Pension compared with the budget cost of superannuation tax concessions under two benchmarks: the income tax benchmark, and the expenditure tax benchmark.

The natural conclusion of this is that it is unwise to slash these concessions — but this is what Deloitte is recommending. If there aren’t large problems with the taxing of super, then it isn’t clear why the system needs as large a change as Deloitte proposes.

Deloitte estimates its changes to the tax on super contributions will increase revenue by $6 billion — and unhelpfully call this tax increase a ‘reform dividend’. A tax impost isn’t a reform dividend. Australia gets a reform dividend if growth increases, and large tax increases won’t generate this growth.

The Deloitte report usefully busts the myths that negative gearing is a tax loophole that is driving property prices through the roof and (correctly) argues negative gearing shouldn’t be removed solely on the basis that rich people are using it.

However there is an inconsistency in the report: it argues the Capital Gains Tax (CGT) discount should be wound back particularly because the discount is more often used by the rich. Consistency would argue that it is poor policy to remove

any tax concession simply because the rich are using it.

Deloitte is also correct in arguing that there should be a CGT discount (to reduce the overtaxation of saving).  But the report does not justify why the current approach is too generous or why their proposed discount of 33⅓% is an improvement.

Deloitte’s report provides some useful analysis for the tax reform debate, arguing that taxes should be lower on saving, and tax rules shouldn’t be changed solely because the rules are used by the rich. However, neither of these arguments justify their proposals for changing the tax treatment of super or capital gains. In busting some myths, they have generated some of their own.